When crafting a financial plan, you need to determine the various components of your business. These include current liabilities, or those you will need to pay in the next twelve months; variable costs, which are expenses you incur when operating your business; and operating expenses.
Variable costs vary from month to month
Financial planning for small business owners is important. Profitability is the number one goal for all businesses, and variable costs play a big role in turning a profit. Unfortunately, small businesses often don’t have the time or resources to overhaul their current systems completely, but there are ways to improve efficiency and cut costs.
Variable costs are costs that go up and down during short periods. Usually, they’re based on the volume of products or services the company sells. For example, the more products and services a company sells, the higher its production and support costs. In contrast, these costs are lower if the sales volume is low.
Another example is commission, which is paid on a percentage of a customer’s purchase. So, while the price of a product might be fixed, the commission cost is based on the output volume.
Operating expenses are costs incurred
Operating expenses are the costs your business incurs to maintain its day-to-day operations. These expenses are generally reported on a company’s income statement, which is used to report net and operating income.
It is essential for business owners to understand operating expenses. Operating costs include the costs incurred from your core business operations and are critical to any organization’s financial health. When operating expenses are high, your business will be less profitable. Using an expense management system can help keep your costs under control. It can help you analyze your business’ revenue and determine whether you need to cut certain costs or hire more employees to improve efficiency.
Operating expenses can be classified as variable or fixed, depending on their nature. A fixed cost is a cost you cannot change, while a variable cost varies with activity level. For example, a full-time office employee may be a fixed cost, while a variable cost is dependent on the production level of the business.
Current liabilities are liabilities you need to pay
Current liabilities are debts a business needs to pay within the next year. They include accounts payable and accrued expenses. Accounts payable are the money a company owes to its suppliers. The accrued interest includes the interest since the last payment was made. Bank loans and overdrafts are examples of short-term liabilities. These are loans a business expects to be paid back within a year.
Other liabilities include loans and deposits due within the next twelve months. A company can list these liabilities in its annual report or 10-K filing. These liabilities include dividends paid to shareholders, interest payable to lenders, and income taxes payable to the government. A business also needs to include consumer deposits on its balance sheet.
A small business should keep track of current liabilities to ensure that the company’s financial health is in good shape. These liabilities should be lower than its current assets. Knowing your current liabilities will help you plan your finances and calculate financial ratios.
The capital you need to raise
Financial projections should be based on sales forecasts and anticipated expenses. Including different scenarios to predict business performance will help convince potential lenders and investors that your business has a solid future. Your plan should also include details about how you will use funds. The goal is to make your plan easy to understand.
Financial health is crucial to business success and is the foundation for outside funding. A sound financial plan can also help you monitor your business growth and make strategic decisions. As a small business owner, you will need to carefully analyze your business and make assumptions about how much cash it will need to survive. You will also need to analyze your competition to determine where to cut costs and what areas you can cut. After developing a good financial plan, you should revisit it often. At the very least, you should update it quarterly. Regular reviews will improve your financial plan and provide new information and insight.